The curious case of Oyo's acquisition of Zo Rooms
It's not often that an investor publishes in its earnings report an acquisition made by an investee company without the deal having been signed and sealed. But that's exactly what happened when Japanese telecom and internet majorSoftBank made public that budget hotel aggregator Oyo Rooms, where it's a major shareholder, acquired its smaller rival, Tiger Global-backed Zo Rooms, on February 10. TOI, after speaking to multiple people close to the development, figured out the final documents of the transaction are still not signed. In fact, there are chances of the acquisition not going through on agreed terms, some said. While several reports emerged speculating about the Oyo-Zo deal starting December last year, the media picked up the news and made it "official" after SoftBank's earnings results for nine months ended December 2015 announced the acquisition of Zo Rooms. In a presentation detailing the progress of its various portfolio companies, SoftBank said in a slide on Oyo, "Acquisition of Zo Rooms", without giving any further details. By now, it was widely known that in an all-stock deal giving Zo's investors a 6-7% stake in Oyo, the two players had come together in a significant consolidation in the budget hotel aggregation market. Zo's seven founders would not be brought on board Oyo and its hostel business under the Zostel brand would be retained post acquisition. But the deal is not done, yet. When TOI probed the matter over the past one month, a different story emerged. "Basically , the deal is not done yet, as there are certain conditions on which Oyo's shareholders are still to agree upon. At the moment, the acquisition has a 60% chance of getting completed," a person privy to the matter told TOI on the condition of anonymity . Gurgaon-based Oyo, which snagged $100 million from SoftBank in August last year, is valued at $400 million, postmoney , and its other investors include Sequoia Capital, Lightspeed Venture Partners, Greenoaks Capital, DSG Consumer Partners and Venture Nursery , besides some angels. Both SoftBank and Ritesh Agarwal, founder of Oyo Rooms, said they had no comments to offer when asked about the acquisition of Zo. A query sent to Paavan Nanda co-founder of Zo Rooms, did not elicit a response till the ti me of going to press. Rise & fall of Zo Talks between Oyo and Zo began a few months after SoftBank invested in 22-yearold Agarwal's startup, which began life as Oravel Stays -an Airbnb clone -in 2012, giving it a noticeable leg-up over its peers. To duke it out with Oyo, Zo needed abundant capital.Having raised around $5 mil ion in its series A round, Zo was in talks to rack up a bigger sum of about $30 mil ion from the likes of Tiger Global and Orios Venture Partners. But somewhere between August and October last year, Zo, which was losing money doling out discounts, wasn't able to gain traction rom investors. While it managed to raise $30 million in its next round of financing, the funds were o come in tranches on the condition of hitting certain argets. And with the funding environment starting to ge skittish, it became difficul or Zo to convince investors to pump more capital to level up o Oyo. There was chatter abo ut Zo not managing to get its second tranche as Tiger's bul ishness around India started o wane around October-No vember of last year. This is when murmurs of Zo's acqui sition started to surface. At the time, Oyo saw buy ng Zo as a means to cast of competition and also get the deep-pocketed New York based investment fund Tiger Global on to its capitalization able, or cap table, a source said. A cap table is a record of all the major shareholders in a company . But things changed quite dramatically in a course of a month starting December ast year. Zo was now lagging way behind Oyo. "It's possib le that the Oyo board felt this would enable the entry of Tiger Global to infuse fresh funds into the combined entity and when they saw there was little interest from Tiger, the deal wasn't seeming so attractive," said another person familiar with the developments. Cash-strapped Zo cuts ops For most industry insiders, the Oyo-Zo deal started to look not as strategic as when talks began even as Zo's presence became increasingly nominal. Both companies were burning cash rapidly for most part of last year. But Zo was unable to raise funds and had no other potential acquirer other than Oyo. By October last year, Zo had pushed the brakes on customer acquisition, which meant its growth numbers were dropping briskly , says a person who did not want to be named. If the company died, Oyo could acquire Zo's properties on the cheap, without the costs in volved in paying off Zo's dues at these properties, he said. Zo has outstanding payments running into lakhs of rupees per property . At its peak, Zo claimed to have a network of 11,000 rooms on its platform with 1,000 hotels across more than 50 cities in India. Oyo, on the other hand, claims to have 45,000 hotel rooms in over 170 cities in India. By January this year, most of the 600 employees of Zo had already left the company and its network had shrunk dramatically with no capital to support opera tions. Even if the acquisition finally goes through, what Oyo would be getting is a company which has practically wound up. And giving a 6-7% stake of Oyo to Zo's investors is surely not making sense to Oyo shareholders in the present situation.